Thursday, Oct 4th 2018

Strong Q2 Earnings Led by Beer


Reminder: The paradigm behind this business is that it effectively buys commodities like wheat and hops, turns them into alcohol beverages like beer, and then distributes them to retailers like BevMo.

Constellation Brands reported strong Q2 earnings today and was up ~6%.

Reminder: The paradigm behind this business is that it effectively buys commodities like wheat and hops, turns them into alcohol beverages like beer, and then distributes them to retailers like BevMo.

Constellation's portfolio of beverage brands leans more premium in nature. For example, Corona, Ballast Point, and Pacifico are all higher priced than, say, Bud Light.

This "premiumization" strategy is a core part of our investment thesis on STZ, and it seems to be working, as today's earnings report showed.

Overall, revenue grew 10%. The majority of this growth came from beer, driven by Corona and Modelo. Beer is about 2/3 of the company's revenue and is also the #1 market share gainer in the U.S. beer industry.

It's not just beer. The company is also winning with its premiumization strategy in the wine category. Constellation's wine business is a bit higher priced than average (it's shifting more toward the $11+ bottle range) which is helping it grow faster as consumers shift to higher-end brands.

Importantly, Constellation isn't sacrificing profits to achieve this sales growth. They've been able to grow as quickly as a typical public tech company AND maintain profit margins. Beer margins are ~40% and actually expanding, while wine is maintaining margins at the ~25% level. Impressive given how many competitors are slashing prices (and profits) to try to win customers.

The leadership team at Constellation has continued to have the foresight to position themselves in the fastest growing categories and at the forefront of consumers' mindshare. We believe they'll continue to execute on this vision. They're already demonstrating it with their investment in marijuana company Canopy Growth.

Ultimately, we're excited at the prospects for the Constellation platform to continue to win in the beverage market.

As of this writing, STZ was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.
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